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Why Playing the Long Game Still Matters with Scottish Mortgage's Tom Slater · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
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  Speaker 2: Welcome to Maren Talk's Money, the podcastings people who know
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  Speaker 2: the markets explain the markets. I'm Maren Zumzert Web. This
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  Speaker 2: week I'm speaking with Thomas Later, manager at the UK's
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  Speaker 2: largest investment company, Scottish Mortgage Investment Trust, something that I
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  Speaker 2: suspect an awful lot of you hold.
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  Speaker 3: If you do, you'll know that.
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  Speaker 2: His long term performance has been spectacular. If you've invested
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  Speaker 2: in two thousands, your money is up ten times since then.
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  Speaker 2: The last five years have not been so great. Twenty
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  Speaker 2: twenty two twenty twenty three were not great years for
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  Speaker 2: the trust, but things are now picking up nicely again.
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  Speaker 2: Over the last year you are up seventeen percent and
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  Speaker 2: a year to date ten percent.
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  Speaker 3: Tom's been involved with the Trust for a decade now.
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  Speaker 2: We've first joined Billy Gibord in two thousand and he
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  Speaker 2: became a partner in two thy and twelve. So a
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  Speaker 2: little more insight in this conversation to how Tom is
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  Speaker 2: looking at investing at the moment and how the trust
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  Speaker 2: is faring.
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  Speaker 3: Tom. Welcome to Merrin Dogs Money.
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  Speaker 4: Thank you very much for having me.
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  Speaker 3: Now listen in.
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  Speaker 2: The introduction I've said a little bit about Scottish mortgage,
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  Speaker 2: but I think it would be super handy given it's
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  Speaker 2: such a well known trust in the UK, but maybe
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  Speaker 2: not so much outside. Just gives a little rundown of
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  Speaker 2: how the trust works, what is invested in and what
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  Speaker 2: you do.
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  Speaker 5: Sure, the trust is a portfolio of what we consider
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  Speaker 5: to be the most exciting growth companies in the world,
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  Speaker 5: and we spend our time looking for these opportunities and
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  Speaker 5: where we find them, we try to be really patient
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  Speaker 5: long term owners. We're not restricted by geography, we're not
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  Speaker 5: restricted by whether a company is public or private. Currently
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  Speaker 5: are about three quarters public companies quarter private companies. That
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  Speaker 5: the defining characteristic is is having a really long time
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  Speaker 5: horizon of which to assess these opportunities. And I guess
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  Speaker 5: the final point is if you look at the portfolio,
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  Speaker 5: it has nothing really to do with Scotland or to
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  Speaker 5: do with mortgages.
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  Speaker 4: That is simply the inheritance of the name.
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  Speaker 3: Yeah, and it's the name you're going to be.
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  Speaker 2: You're going to have long term, right, a lot of
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  Speaker 2: trust with what you might consider to be old fashioned
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  Speaker 2: names have begun to change them and shift around the place.
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  Speaker 2: But Scottish Mortgage is so well known as a brand
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  Speaker 2: that you can probably hang on to this name that
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  Speaker 2: doesn't in any way refer to the content of the portfolio.
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  Speaker 5: Fine, well, I think the heritage is really really important
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  Speaker 5: in the history. I do think it's sad when these
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  Speaker 5: trusts get incorporated into sort of bland corporate nomenclature.
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  Speaker 2: Now, listen, one of the things I said in the
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  Speaker 2: introduction is that this trust has phenomenal long term performance,
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  Speaker 2: but shorter term things have been a little ropie. So
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  Speaker 2: if we go back to twenty twenty one, that was
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  Speaker 2: a phenomenal year. The trust was up, the share price
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  Speaker 2: was up nearly one hundred percent or so, and then
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  Speaker 2: we went into twenty two to twenty three, and the
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  Speaker 2: twenty two in particular was a twenty two was an
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  Speaker 2: all right year. Twenty twenty three it was a horrible year.
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  Speaker 2: And since then things have improved, but nonetheless but not
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  Speaker 2: anywhere near back to the highs of those heady days
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  Speaker 2: of twenty twenty one. Just explain quickly for people who
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  Speaker 2: haven't engaged with the trust what it is that happened
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  Speaker 2: during that period.
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  Speaker 5: What happened I think as we went into the COVID
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  Speaker 5: period is that the world came to a lot of
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  Speaker 5: the companies that we owned. We owned Amazon, for example,
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  Speaker 5: and we all moved to starting shopping online. We owned
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  Speaker 5: many of the enterprise software companies that facilitated working from home.
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  Speaker 5: So we went through this period where the companies that
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  Speaker 5: we owned had this real boost to their businesses. And
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  Speaker 5: then as we exited the COVID period, I think habits
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  Speaker 5: reverted to normal a lot faster than we had anticipated,
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  Speaker 5: and so the tide went out for a lot of
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  Speaker 5: our companies, and that made things pretty difficult. And in
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  Speaker 5: the period you're describing, I think if you wind the
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  Speaker 5: clock forward to today, what we've seen is these companies
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  Speaker 5: dealt with very rapidly rising interest rates and changing demand patterns,
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  Speaker 5: and the best among them really took those signals seriously,
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  Speaker 5: and they thought pretty carefully about what they were going
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  Speaker 5: to do with their costs, with their headcount, and prioritized
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  Speaker 5: within their business the projects. You know, in an environment
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  Speaker 5: where capital had no cost, you do everything and you
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  Speaker 5: pursue growth. But as soon as the interest rates rose rapidly,
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  Speaker 5: they started to think much more carefully about prioritizing what
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  Speaker 5: they were doing, and so you've seen this recovery and
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  Speaker 5: profitability across the portfolio companies moving from sort of break
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  Speaker 5: even by choice to earning really pretty good margins today.
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  Speaker 5: And I think that's real source of optimism as you
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  Speaker 5: look forward, that you have that degree of robustness and
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  Speaker 5: adaptability that's come from that challenging period in the aftermath
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  Speaker 5: of COVID.
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  Speaker 2: And would you say that as a result of that
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  Speaker 2: challenging period that you've been through and your companies have
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  Speaker 2: been through, you have shifted anything in your investment process.
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  Speaker 2: I mean, looking back, for example, the investment process is
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  Speaker 2: very influenced by a piece of research that suggested that
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  Speaker 2: nearly all the returns in the stock market come from
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  Speaker 2: four percent of companies, right. I remember this fascinating bit
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  Speaker 2: of research that came out and Billy Gifford really looked
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  Speaker 2: at very carefully and reacted to. But one of the
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  Speaker 2: things possibly about looking at the market like that and
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  Speaker 2: thinking well, we must have those four percent of companies
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  Speaker 2: was thinking we must have those four percent of companies
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  Speaker 2: at any price, yep. And so possibly going into twenty
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  Speaker 2: twenty twenty twenty one, there was less of a focus
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  Speaker 2: on valuation inside your portfolio than there might have been.
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  Speaker 2: So I suppose the question is, since then is there
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  Speaker 2: a different approach to the valuation of companies, regardless of
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  Speaker 2: their amazingness.
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  Speaker 5: I think the philosophy that you've mentioned is core to
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  Speaker 5: what we do. It is just a fact of life
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  Speaker 5: that if you extend the timeframe through which you look
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  Speaker 5: at stock markets, you get a skewed distribution of returns.
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  Speaker 5: It's not the normal distribution that we're taught in our
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  Speaker 5: financial analyst training. It's that a small number of companies
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  Speaker 5: drive the returns, and so for us, it's how do
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  Speaker 5: you identify companies with that opportunity and how do you
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  Speaker 5: hold on to them for long enough that the return
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  Speaker 5: acruise for our shareholders? And in a way, it's that simple.
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  Speaker 5: But it also is really important that when you go
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  Speaker 5: through a period of tough performance that it triggers some
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  Speaker 5: introspection that you look at process and think about, well,
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  Speaker 5: what could I have done differently. One of those process
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  Speaker 5: outcomes for me is thinking about resilience and robustness. So
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  Speaker 5: it's all very well to imagine where a company will
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  Speaker 5: be five or ten years from today, but the conditions
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  Speaker 5: that it encounters along the way will be faced with
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  Speaker 5: today's business, So do you have the resilience and robustness
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  Speaker 5: to get through that in order to achieve that bigger
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  Speaker 5: pay chairman. That's why I started with this point that
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  Speaker 5: actually you've seen significant improvement and profitability in the companies
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  Speaker 5: we own. That for me is really encouraging because it
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  Speaker 5: says you have the resilience and robustness to go after
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  Speaker 5: that bigger picture dream. And then another point about valuation.
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  Speaker 5: Valuation has always been a part of our process and
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  Speaker 5: a really important part of our process. But what we
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  Speaker 5: don't do is look at short term price earnings ratios
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  Speaker 5: and say, well, this stock is valued at twenty times
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  Speaker 5: its earnings, Therefore it's cheap or it's expensive. We think
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  Speaker 5: there's very little information in that. So the timeframe that
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  Speaker 5: we think about valuation is how do we make our
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  Speaker 5: required level of return over the next five years, And
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  Speaker 5: at any given point there's a high degree of uncertainty
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  Speaker 5: in that. So if you take that back to what
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  Speaker 5: was happening in twenty one twenty two, with the benefit
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  Speaker 5: of hindsight, yesumber of companies had got ahead of themselves,
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  Speaker 5: but you also have to remember that valuation is always
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  Speaker 5: a relative game, and so with interest rates at zero,
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  Speaker 5: with growth rates that were being delivered by some of
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  Speaker 5: these companies revenue growing fifty or sixty percent, then actually
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  Speaker 5: the relative valuation didn't look particularly challenging, and with the
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  Speaker 5: benefit of hindsight, the sensible thing to do would have
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  Speaker 5: been to have gone into a lot more boring types
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  Speaker 5: of stocks, which themselves look pretty expensive relative to their history.
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  Speaker 5: But that for us isn't That doesn't fit the philosophy
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  Speaker 5: of what we're trying to do. It would not have
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  Speaker 5: been consistent with the very clear objectives that we set
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  Speaker 5: out for shareholders. So yes, it was a mistake, but
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  Speaker 5: it's I think staying true to the philosophy is really
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  Speaker 5: important and deviating from that would have been a bigger mistake.
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  Speaker 2: Yeah. Well, you could also say that it's a little
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  Speaker 2: early to say whether it was a mistake or not.
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  Speaker 2: We'll see the benefits have been long term, exactly, and
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  Speaker 2: I suppose.
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  Speaker 3: Yeah.
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  Speaker 2: The other question to ask really is that we know
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  Speaker 2: you're answer to this, but a lot of people would
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  Speaker 2: say that if it is true that four percent of
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  Speaker 2: the companies drive the majority of returns, which moment of
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  Speaker 2: course it is because you've done very long term research
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  Speaker 2: into this. Then the answer is not necessarily to hold
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  Speaker 2: a trust or put your faith in a manager who
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  Speaker 2: believes they can find that four percent, but simply to
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  Speaker 2: hold an ETF that covers the whole market, so you
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  Speaker 2: definitely get them. So you have to have a lot
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  Speaker 2: of faith in a manager to believe that they're the
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  Speaker 2: ones who can find the four percent. So I think
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  Speaker 2: what we should do now is move on to talking
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  Speaker 2: about how you find those companies. How do you look
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  Speaker 2: at the market and say this is the one that
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  Speaker 2: will survive. I mean, even in something like AI, which
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  Speaker 2: obviously going to be a phenomenally transformative thing already is
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  Speaker 2: transformative for the economy and for our for everyone's lives,
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  Speaker 2: there are a lot of companies doing this. How do
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  Speaker 2: you look at a company and say, this is the
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  Speaker 2: one that will be in that four percent that will
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  Speaker 2: almost definitely drive the returns that we've promised are invested.
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  Speaker 5: I suppose the first thing is that I agree with
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  Speaker 5: your your premise there. I think either you just stone
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  Speaker 5: the whole market, and that's a pretty sensible thing for
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  Speaker 5: people to do, especially if you can do it at
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  Speaker 5: a very low cost. You will capture those companies. But
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  Speaker 5: you do have to accept the price of doing that
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  Speaker 5: is that you will be diluted by the other ninety
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  Speaker 5: six percent of companies that don't matter.
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  Speaker 3: So in the way you should you should do one
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  Speaker 3: or the other.
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  Speaker 2: You shouldn't. You shouldn't mess around in the middle. You
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  Speaker 2: should either have either have as someone who has the
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  Speaker 2: whole market or have someone who's making a genuine effort
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  Speaker 2: to have that that four percent.
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  Speaker 4: In my view, you should do both.
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  Speaker 5: You know, I think it's a perfectly sensible thing to
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  Speaker 5: have that broad exposure at very low cost. And then
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  Speaker 5: I think depending on your risk appetite, we are a
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  Speaker 5: volatile portfolio. We embrace that volatility in the pursuit of
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  Speaker 5: long term growth. But that's not for everybody. But we
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  Speaker 5: do think for those that want to go after that
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  Speaker 5: higher level of appreciation, that there's the role for both,
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  Speaker 5: you know, concentrated active management and index exposure.
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  Speaker 4: But key in this is keeping costs to a minimum.
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  Speaker 3: You know.
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  Speaker 5: It's it's if you're going to pay for active management,
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  Speaker 5: then pay as little as you can and get genuinely
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  Speaker 5: active portfolio for your money.
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  Speaker 3: Yeah, okay, so how hell.
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  Speaker 5: First of all, it's it's it's go back to what
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  Speaker 5: is the scale of the opportunity and is it growing
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  Speaker 5: or shrinking? And what is the likelihood of capitalizing on
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  Speaker 5: that opportunity? And is that increasing or falling? I think
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  Speaker 5: those are the two starting points for process. There are
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  Speaker 5: lots of great businesses out there, strong franchises, great combative positions,
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  Speaker 5: But can you really say there is the opportunity for
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  Speaker 5: this business to be many times at size in the future.
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  Speaker 5: And so for us, that's a question that narrows down
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  Speaker 5: the universe pretty quickly. And then is that opportunity growing
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  Speaker 5: or shrinking. So if you take Amazon, which is one
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  Speaker 5: of our most successful investments of the past twenty five years,
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  Speaker 5: I think we bought it in two thousand and four,
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  Speaker 5: two thousand and five, so that's twenty years, not twenty five.
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  Speaker 5: But if you look at that business and through our ownership,
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  Speaker 5: what we were continually able to say is that the
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  Speaker 5: opportunity was increasing in size. It started as a bookseller,
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  Speaker 5: it went into ebooks, it went into media more broadly,
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  Speaker 5: it went into general merchandise, it went into selling computing infrastructure.
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  Speaker 5: Every time we revisited the case, you could say, I
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  Speaker 5: think this opportunity is big, and it's getting larger. And
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  Speaker 5: then as you went through time, you could also see
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  Speaker 5: that its competitive position was getting stronger. We talked about
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  Speaker 5: its competition relative to Bonds and Noble and other physical
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  Speaker 5: book retailers. We talked about its competitive position relative to
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  Speaker 5: eBay in online commerce. But over the years it just
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  Speaker 5: became clear and clearer that this was business which had
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  Speaker 5: a higher and higher likelihood on capitalizing on an opportunity
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  Speaker 5: that was growing. And so when you looking at opportunities today,
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  Speaker 5: some of the companies we've bought in the past year
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  Speaker 5: would be New Bank and Revolute to digital online banking businesses.
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  Speaker 5: New Bank focused on Latin America, more focused on Europe.
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  Speaker 5: And it seems to us that for the next billion
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  Speaker 5: consumers who are going to have a bank account, they're
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  Speaker 5: going to come through one of these digital platforms, not
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  Speaker 5: one of the traditional banks. They have a huge advantage
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  Speaker 5: over traditional banks with the in terms of their cost structure,
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  Speaker 5: not having branches and all that goes with that, and
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  Speaker 5: their digital tools have a huge reach, so they can
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  Speaker 5: get better faster than those that are limited to a
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  Speaker 5: single market and a smaller number of customers. So that's
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  Speaker 5: an opportunity that's big. It's an opportunity that's growing, and
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  Speaker 5: the longer time goes on and you don't see any
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  Speaker 5: competitive response from from those traditional regional branch based banks,
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  Speaker 5: the more likely it is we think those companies will
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  Speaker 5: capitalize on that opportunity.
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  Speaker 2: Okay, so when we look at themes, a lot of
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  Speaker 2: what you invest in is obviously at tech. So it's
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  Speaker 2: around the AR revolution, it's around digitalization. Where are the
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  Speaker 2: most interesting parts inside that tech revolution? It seems to
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  Speaker 2: be moving faster I think than even you might have
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  Speaker 2: thought a few years ago.
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  Speaker 5: The way that I look at this is that it's
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  Speaker 5: tech is not really a very helpful label. You know,
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  Speaker 5: we could talk about the companies that are using electricity
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  Speaker 5: or the companies that use telecoms. The fact that they
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  Speaker 5: are using technology is neither a helpful way of categorizing
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  Speaker 5: them or really understanding their advantages.
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  Speaker 4: The way we prefer to think.
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  Speaker 5: About it is, if you take stick with the example
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  Speaker 5: of Amazon, it's part analyzing the resale business and it's
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  Speaker 5: part analyzing the infrastructure business.
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  Speaker 4: If you look at.
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  Speaker 5: Meta, the owners of Facebook and Instagram, it's more about
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  Speaker 5: media and share of attention than anything else. It's about
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  Speaker 5: selling advertisements. But I think you know, where tech becomes
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  Speaker 5: really relevant is in the in the leadership of these
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  Speaker 5: businesses and the understanding of how technology is driving change
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  Speaker 5: in their industries.
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  Speaker 4: Take your example of AI.
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  Speaker 5: If you think about how a typical enterprise encounters AI
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  Speaker 5: and thinks about deploying it, senior management will say, right,
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  Speaker 5: there's something to this whole AI thing. Let's find somebody
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  Speaker 5: from the I T department who knows about it, and
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  Speaker 5: then you know, if they get increasing conviction, they maybe
• 15:43
  Speaker 5: bring in a consultant to tell them about AI. Then
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  Speaker 5: perhaps you do an experiment. Let's find some little bit
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  Speaker 5: of our business where we can develop some of these tools,
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  Speaker 5: and let's see what happens. And you know, maybe we
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  Speaker 5: can take some people out of the customer service department
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  Speaker 5: because we can use some of these tools to blow
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  Speaker 5: AI and that whole process, that feedback loop just takes
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  Speaker 5: a long time. Now you compare that to let's stick
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  Speaker 5: with Meta and Mark Zuckerberg, somebody who has a real
• 16:15
  Speaker 5: deep understanding of this technology. You can see immediately where
• 16:20
  Speaker 5: it has application in the business. You know, how do
• 16:23
  Speaker 5: we gain competitive advantage from deploying these tools? How do
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  Speaker 5: we drive revenue in the business from deploying these tools,
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  Speaker 5: and then you can see all these projects that are
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  Speaker 5: springing up the way that they're transforming what they're doing.
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  Speaker 5: So if you look at time spent on Facebook, for example,
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  Speaker 5: which is a pretty mature platform at this point, it
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  Speaker 5: was up about eight percent last year, and that's because
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  Speaker 5: they were using AI tools to surface content that their
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  Speaker 5: users love them, were engaged with, and so you can
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  Speaker 5: see the immediate impact in the business. Shopify would be
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  Speaker 5: another great example. That's a business that creates tools for
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  Speaker 5: retailers to operate their business. So whether that's having their
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  Speaker 5: own website, you know, selling through platforms like metas platforms, Instagram,
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  Speaker 5: et cetera, helping their physical stores doing point of sale.
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  Speaker 5: But what you have as a technical leader who immediately
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  Speaker 5: understands how AI can make the business better and deploys
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  Speaker 5: the technology to increase the relative advantage that they have
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  Speaker 5: to other players in that industry. So go back to
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  Speaker 5: the philosophy. It increases the size of the opportunity because
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  Speaker 5: you can do more with this technology, and it increases
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  Speaker 5: the likelihood of success because you deploy it faster than
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  Speaker 5: your competitors. And so when we're looking at technology, we
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  Speaker 5: don't get excited about you know, this is a great
• 17:43
  Speaker 5: widget or this is a you know, a great tech.
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  Speaker 5: It's more, these are great businesses and they can deploy
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  Speaker 5: this to improve their relative position.
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  Speaker 4: That's what gets us really excited.
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  Speaker 2: Okay, interesting, And one of the things that you've written
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  Speaker 2: about and talked about before is how if we want
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  Speaker 2: this gen rational AI to be truly transformational, which we do,
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  Speaker 2: we want it to drive or expecting it to drive
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  Speaker 2: a productivity revolution across the world. Finally, thank goodness, we've
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  Speaker 2: been wasting a long time for that productivity revolution, haven't we.
• 18:10
  Speaker 2: That If that's to happen, it's got to be ubiquitus.
• 18:12
  Speaker 2: So everyone has to have chips, So you can't have
• 18:15
  Speaker 2: these very expensive chips. It's not going to continue that
• 18:18
  Speaker 2: the producers have these very very high margins. And one
• 18:21
  Speaker 2: of your most successful positions over recent years has been
• 18:24
  Speaker 2: a video of course, but that's going to suffer as
• 18:27
  Speaker 2: a consequence of the commoditization of the products right well.
• 18:32
  Speaker 5: And video is absolutely at the heart of this AI
• 18:36
  Speaker 5: revolution that we are seeing and we're going to see.
• 18:39
  Speaker 5: But I do think that we have to bring down
• 18:42
  Speaker 5: the cost of these systems massively. If you look at
• 18:46
  Speaker 5: the deployment of technology in previous waves, whether that was
• 18:51
  Speaker 5: the mainframe computer, the personal computer, mobile devices, online, the cloud,
• 18:58
  Speaker 5: and all of them brought prices down and that was
• 19:03
  Speaker 5: a really important component of the spread of the technology.
• 19:06
  Speaker 4: Now that has been happening in AI.
• 19:09
  Speaker 5: If you look at the you know, the cost of
• 19:13
  Speaker 5: processing tokens in these models is coming down very rapidly,
• 19:17
  Speaker 5: but there is this real constraint, this bottleneck in that
• 19:21
  Speaker 5: we just don't have enough compute and that's led to
• 19:26
  Speaker 5: two very high chip prices. You can see it in
• 19:30
  Speaker 5: Nvidia's margins because they have been almost a monopoly provider
• 19:36
  Speaker 5: of the silicon that's needed for this and for me,
• 19:41
  Speaker 5: I think if if we're really going to see this
• 19:46
  Speaker 5: technology reach its true potential, you are going to see
• 19:49
  Speaker 5: more than one provider of the silicon to do it.
• 19:52
  Speaker 5: As you move from the training phase for these systems
• 19:57
  Speaker 5: to the deployment phase, so you're running in who are
• 20:00
  Speaker 5: actually using the technology. It's not clear that Nvidia's edge
• 20:04
  Speaker 5: is as strong in that inference market as it has
• 20:08
  Speaker 5: been in the training market. So inspite to how much
• 20:10
  Speaker 5: exposure do you want to have, and the decision we
• 20:12
  Speaker 5: took last year is that we would reduce our direct
• 20:16
  Speaker 5: exposure to Nvidia. We bought and then grew a new
• 20:19
  Speaker 5: holding in TSMC, which is the biggest manufacturer of these
• 20:23
  Speaker 5: chips and is a bit more agnostic to who is
• 20:26
  Speaker 5: designed them. But we're also putting money into companies like Matter,
• 20:29
  Speaker 5: so we don't want to reduce our overall exposure to
• 20:31
  Speaker 5: this area, which is is you know, it's going to
• 20:33
  Speaker 5: define the next twenty years of investing, but it's we
• 20:37
  Speaker 5: don't think it's going to be as concentrated in Nvideo
• 20:40
  Speaker 5: as it has been over the past two or three years.
• 20:44
  Speaker 2: Yeah, I mean the other big bottleneck in the AI
• 20:47
  Speaker 2: story is the energy part of it, right, So we're
• 20:50
  Speaker 2: going to have all these huge data centers and this
• 20:53
  Speaker 2: is incredibly energy hungry. I'm sure become less energy hungry
• 20:57
  Speaker 2: over the years, but nonetheless we do have this constraint
• 20:59
  Speaker 2: on it at the moment to overlook at investing in
• 21:02
  Speaker 2: the energy sector. And we've talked on a podcast a
• 21:04
  Speaker 2: few weeks ago about how extraordinary it is that people
• 21:07
  Speaker 2: are paid to the moon and back for a company
• 21:09
  Speaker 2: that is connected to AI, but absolutely nothing for the
• 21:12
  Speaker 2: mining companies that produce the materials, without which none of
• 21:15
  Speaker 2: these things can exist.
• 21:17
  Speaker 5: Yeah, I think energy is a significant constraint, and we're
• 21:22
  Speaker 5: moving from an environment where you've seen very little growth
• 21:27
  Speaker 5: in energy demand for quite a sustained period in Western
• 21:30
  Speaker 5: economies to one where you can see that demand growth
• 21:34
  Speaker 5: coming through. And actually it's pretty easy to pick up
• 21:37
  Speaker 5: on because, particularly in the US, the utilities have to
• 21:40
  Speaker 5: submit these ten year plans, and so you can see
• 21:42
  Speaker 5: the assumptions in those plans changing over time.
• 21:46
  Speaker 4: I think the piece.
• 21:49
  Speaker 5: Of that that gets us most excited is the renewable
• 21:52
  Speaker 5: energy generation part of it. You've seen the cost of
• 21:56
  Speaker 5: energy generation with solar continue to decline. You've seen the
• 21:59
  Speaker 5: cost of solar plus storage also decline quite markedly. With
• 22:05
  Speaker 5: the progress that's been made in batteries, we recently took
• 22:08
  Speaker 5: a new holding in c ATL, which is the world's
• 22:10
  Speaker 5: biggest battery manufacturer, I think we'll see the deployment of
• 22:15
  Speaker 5: this technology at an increasingly rapid rate at the moment,
• 22:18
  Speaker 5: and I think more driven by geopolitical reasons. The US
• 22:22
  Speaker 5: is more oriented towards natural gas deployment. But the challenge
• 22:27
  Speaker 5: there is that you've seen huge cost inflation in turbines,
• 22:30
  Speaker 5: for example, over the past few years. Which has made
• 22:33
  Speaker 5: solar plus storage more competitive. And then there are huge
• 22:39
  Speaker 5: constraints on the supply chain. So if you order a
• 22:41
  Speaker 5: new gas turbine today, it's going to be well into
• 22:44
  Speaker 5: the twenty thirties before you take delivery of it. So
• 22:47
  Speaker 5: those things, to me, say, solar plus storage, which continues
• 22:51
  Speaker 5: on this declining cost trajectory, is just going to get
• 22:55
  Speaker 5: more and more important.
• 22:56
  Speaker 4: I think that's a really exciting area.
• 22:59
  Speaker 3: Yeah, okay, interesting.
• 23:01
  Speaker 2: The other area that you invest in that I think
• 23:05
  Speaker 2: when people look at your portfolio they find vaguely unexpected
• 23:07
  Speaker 2: or the Ferrari in particular is being quite a big
• 23:10
  Speaker 2: driver of returns. And now you've got Ames as well.
• 23:13
  Speaker 2: These people will look at these and go, well, that
• 23:14
  Speaker 2: doesn't fit with my perception of Scottish mortgage. What's in
• 23:18
  Speaker 2: these luxury goods companies? Because I think we can call
• 23:20
  Speaker 2: Ferrari a luxury goods company, can't we? That works with
• 23:23
  Speaker 2: your ideas?
• 23:24
  Speaker 5: Yeah, absolutely, you call it a luxury goods company. And
• 23:27
  Speaker 5: I think when you think about growth, and remember we're
• 23:30
  Speaker 5: a growth fund, we're not a tech fund. When you
• 23:33
  Speaker 5: think about growth, there are some companies that will deliver
• 23:36
  Speaker 5: transformational growth in short periods of time, and there are
• 23:40
  Speaker 5: others that will exploit their opportunity more gradually, but for
• 23:45
  Speaker 5: very long periods of time, and everything else is on
• 23:48
  Speaker 5: a spectrum in between. And I think what's exciting for
• 23:51
  Speaker 5: me about those luxury companies is that you can foresee
• 23:56
  Speaker 5: growth not just for the next two or three years,
• 23:59
  Speaker 5: but for the next twenty or thirty years, and you
• 24:01
  Speaker 5: can see the governance structures, the ownership structures that are
• 24:04
  Speaker 5: going to facilitate that, whether that's that family involvement, and
• 24:10
  Speaker 5: the time horizons there exceed even the ones we have
• 24:12
  Speaker 5: at Scottish Mortgage. And what that means is a patient exploitation.
• 24:16
  Speaker 5: It means these companies can make their own weather. We
• 24:20
  Speaker 5: worry less about what's going on in the economy or
• 24:22
  Speaker 5: interest rates because it's at that operational execution, the low
• 24:28
  Speaker 5: capital intensity, real understanding of their consumers and where we
• 24:34
  Speaker 5: can find those assets that we think are underappreciated. You know,
• 24:38
  Speaker 5: we're absolutely delighted to have them in the portfolio.
• 24:41
  Speaker 2: Okay, so Tom, quite a lot of the portfolio is
• 24:42
  Speaker 2: invested in in companies based in China, right of fourteen
• 24:46
  Speaker 2: fifteen percent at the moment, there's been all sorts of
• 24:49
  Speaker 2: conversations about the relationships between the US and China. We've
• 24:52
  Speaker 2: got the tariff larvas, We've got the erratic nature of
• 24:56
  Speaker 2: President Trump's behavior around geopolitics, etc. Are you happy with
• 25:00
  Speaker 2: your investments in China and with the extent of the
• 25:03
  Speaker 2: portfolio that is exposed to it.
• 25:05
  Speaker 5: Well, it's been a pretty difficult environment investing in China
• 25:09
  Speaker 5: over the past five years. Most of that actually has
• 25:13
  Speaker 5: come from the approach of the Chinese authorities to the
• 25:17
  Speaker 5: private sector. Many people, in fact, most investors, have really
• 25:21
  Speaker 5: given up on China in that period. But we have
• 25:25
  Speaker 5: stuck with it, albeit at a reduced scale within the portfolio.
• 25:30
  Speaker 5: But what's allowed us to do that is that these
• 25:32
  Speaker 5: companies are some of the most dynamic, exciting businesses that
• 25:37
  Speaker 5: we can own. We think they're some of the best
• 25:39
  Speaker 5: management teams that we can get exposure to, and we
• 25:43
  Speaker 5: can own these businesses at very attractive valuations. As I
• 25:47
  Speaker 5: look at it today, there are genuine concerns from a
• 25:50
  Speaker 5: geopolitical standpoint. I'm just back from a week in the
• 25:53
  Speaker 5: US and it's clear that there is an intense focus
• 25:58
  Speaker 5: on competition with China with you know, within the US.
• 26:03
  Speaker 5: But I think you've got to stand back and say, well,
• 26:05
  Speaker 5: where is that coming from? And for me, it's coming
• 26:10
  Speaker 5: from the fact that China is very successfully moving towards
• 26:15
  Speaker 5: being a high tech economy.
• 26:17
  Speaker 4: It's it's moving away.
• 26:19
  Speaker 5: About the balance of exposure, is moving away from low
• 26:22
  Speaker 5: tech mass production to becoming a leader in a science
• 26:26
  Speaker 5: technology oriented, high tech manufacturing economy, and that that's what's
• 26:31
  Speaker 5: that's what's threatening to the US and others. But those
• 26:35
  Speaker 5: things are are interesting trends to be exposed to as
• 26:38
  Speaker 5: an investor. If you take a holding in Mayitwan, it
• 26:42
  Speaker 5: is one of the leading companies globally, globally and providing
• 26:46
  Speaker 5: local services. It operates at a scale that no one
• 26:50
  Speaker 5: else does, has a level of sophistication that you can't
• 26:53
  Speaker 5: get exposure to elsewhere. And you know, Byte Dance the
• 26:57
  Speaker 5: owners of TikTok again one of the world's leading AI
• 27:00
  Speaker 5: companies that we're seeing Western companies scrabbling to imitate because
• 27:06
  Speaker 5: it is the leader and where we can find those
• 27:09
  Speaker 5: opportunities at attractive prices. We're very happy to be the
• 27:14
  Speaker 5: long term supporter of owners. I think the challenge is
• 27:18
  Speaker 5: the top down one. How much of the portfolio in
• 27:21
  Speaker 5: aggregator you prepared to have exposed to China because there
• 27:26
  Speaker 5: are some homogeneous risks there, and that's something we spend
• 27:30
  Speaker 5: a lot of time discussing in board meetings.
• 27:33
  Speaker 2: So we're probably not going to see the Chinese exposure
• 27:35
  Speaker 2: go up much in a hurry.
• 27:37
  Speaker 5: It's significantly higher than you will find in most global portfolios,
• 27:43
  Speaker 5: but we are cognizant of the challenges that may come
• 27:48
  Speaker 5: from owning Chinese assets as a West investor, and it's
• 27:53
  Speaker 5: just how much risk are you prepared to take? And
• 27:58
  Speaker 5: if I can put it a slightly different way, one
• 28:00
  Speaker 5: of the ways we've thought about it is if I'm
• 28:03
  Speaker 5: going to take that risk, what is the return threshold
• 28:06
  Speaker 5: that I'm looking for? And so when you look at
• 28:10
  Speaker 5: some of the very big Chinese platform companies that we've
• 28:13
  Speaker 5: owned in the past, we've decided that if we're going
• 28:16
  Speaker 5: to take China risk, then it's going to be challenging
• 28:20
  Speaker 5: for those companies to deliver the type of returns that
• 28:23
  Speaker 5: we would expect to compensate for that risk prodject and
• 28:29
  Speaker 5: we prefer to own companies like BYD the auto manufacturer,
• 28:34
  Speaker 5: like c ATL the battery manufacturer, where we think that
• 28:38
  Speaker 5: that potential upside is just higher.
• 28:41
  Speaker 3: Tom.
• 28:42
  Speaker 2: The other part of the portfolio that's been causing you
• 28:44
  Speaker 2: some bother and not everybody is one hundred percent comptrol
• 28:46
  Speaker 2: with is the percentage that is in private companies as
• 28:50
  Speaker 2: opposed to listed companies. That's about twenty five percent of
• 28:52
  Speaker 2: the portfolio. And I know that it makes sense to
• 28:56
  Speaker 2: you as an investor because you say that it doesn't
• 28:58
  Speaker 2: make any difference to you where you find the growth.
• 29:01
  Speaker 2: You're agnostic as to whether something is listed or not.
• 29:04
  Speaker 2: But of course there are issues for investors around the
• 29:09
  Speaker 2: extent to how those are valued, how often they're valued,
• 29:12
  Speaker 2: and how that works inside the portfolio. But you're still
• 29:16
  Speaker 2: comfortable with this right still, where you're finding or believing
• 29:19
  Speaker 2: that you're finding fantastic opportunities.
• 29:21
  Speaker 4: I would frame it a little bit differently.
• 29:23
  Speaker 5: I'd say these are some of the most exciting opportunities
• 29:28
  Speaker 5: that we can find, and it's very difficult for individuals
• 29:34
  Speaker 5: to get access to some of these large private companies.
• 29:39
  Speaker 5: If you do find structures that get you access, you
• 29:42
  Speaker 5: have to pay extremely high fees to do it. So
• 29:46
  Speaker 5: I think it's a really central aspect of what we're
• 29:49
  Speaker 5: doing to get access to these companies that in previous
• 29:53
  Speaker 5: areas would have been listed companies, and to do so
• 29:56
  Speaker 5: within our existing cost structure. And I think that's such
• 30:00
  Speaker 5: a crucial part of the proposition to our shareholders. If
• 30:04
  Speaker 5: I look at SpaceX, there's not some listed equivalent of
• 30:08
  Speaker 5: SpaceX that you can buy. It is a singular opportunity.
• 30:12
  Speaker 5: If you look at Stripe, the payment processing business, it
• 30:16
  Speaker 5: carries about two percent of global GDP on its platform.
• 30:19
  Speaker 5: These are huge, really important, really exciting growth companies, and
• 30:23
  Speaker 5: so I think it's essential that we get this exposure
• 30:26
  Speaker 5: for our shareholders. There's a couple of prices to pay
• 30:30
  Speaker 5: for that. One is that because we sign non disclosure
• 30:33
  Speaker 5: agreements to these companies, we can't be completely transparent with
• 30:37
  Speaker 5: what's going on there. They are private for reason, because
• 30:39
  Speaker 5: they want privacy, so we disclose as much as we can.
• 30:45
  Speaker 5: We've also put a lot of work into making the
• 30:48
  Speaker 5: valuation process as transparent as we can. We value these
• 30:52
  Speaker 5: things very regularly, hundreds of times a year for the
• 30:56
  Speaker 5: portfolio and aggregate, and we keep the accounting rule is
• 31:00
  Speaker 5: that our nest asset values should have these assets in
• 31:03
  Speaker 5: the books as close to what they would trade at
• 31:08
  Speaker 5: today as we can get it, and so there's a
• 31:10
  Speaker 5: whole infrastructure third party valuation companies internal valuation processes. That
• 31:18
  Speaker 5: means we keep the navas as live as it is
• 31:21
  Speaker 5: possible to do, and that's very different from what happens
• 31:24
  Speaker 5: at many private equity firms. So the first price we
• 31:28
  Speaker 5: pay is the one of transparency. The second is these
• 31:33
  Speaker 5: assets are aquid. If we want to buy back stock
• 31:36
  Speaker 5: in the trust, you can't easily sell these assets to
• 31:39
  Speaker 5: do that. But we think both those prices are absolutely
• 31:42
  Speaker 5: worth paying because we think the returns that we can
• 31:45
  Speaker 5: deliver to shareholders from investing in these companies justifies that.
• 31:49
  Speaker 2: And you have been just to pick up what you
• 31:51
  Speaker 2: said about the difficulty of buying back when you have
• 31:53
  Speaker 2: a big private element to the portfolio. You are buying
• 31:56
  Speaker 2: back in scale at the moment to try and close
• 31:58
  Speaker 2: the discount that's come arrived in the last few years.
• 32:01
  Speaker 5: Yeah, Well, we have a very long standing commitment to
• 32:04
  Speaker 5: keep the asset value and share price of the trust
• 32:07
  Speaker 5: as close together as we can. If you look over
• 32:11
  Speaker 5: the past twenty five years, we've bought back close to
• 32:14
  Speaker 5: half the shares outstanding and in pursuit of that aim,
• 32:18
  Speaker 5: So there is a discount that's opened up in recent years.
• 32:22
  Speaker 5: The board put out a really strong statement about that
• 32:26
  Speaker 5: just over a year ago, and we've been very active
• 32:28
  Speaker 5: in buying back shares since then. That commitment remains remains unchanged.
• 32:34
  Speaker 4: So it's.
• 32:38
  Speaker 5: It is absolutely in Shell's best interest to try and
• 32:40
  Speaker 5: keep that share price and now as close together as possible.
• 32:44
  Speaker 5: But equally, the capital you spend on buying back shares,
• 32:47
  Speaker 5: you can't be spending on putting into into new opportunities.
• 32:50
  Speaker 5: So you know, the sooner we can we can make
• 32:53
  Speaker 5: progress with that, the better, Quite.
• 32:55
  Speaker 2: Right, Tom, You spend a lot of time, maybe all
• 32:58
  Speaker 2: your time, looking to the future. I mean one of
• 33:00
  Speaker 2: the one of the slogans of the trust is that
• 33:03
  Speaker 2: the future be there first, right, So you're always looking
• 33:06
  Speaker 2: ahead and we all think that we're trying to look ahead.
• 33:09
  Speaker 2: But when you look out the next ten years, what
• 33:12
  Speaker 2: change do you think will come that the rest of
• 33:14
  Speaker 2: us haven't seen yet?
• 33:15
  Speaker 3: That we're not ready for that?
• 33:17
  Speaker 2: You know, I'm sitting here at my desk and I add,
• 33:19
  Speaker 2: there's things that I simply haven't seen that you have.
• 33:22
  Speaker 3: What would be the big one there?
• 33:24
  Speaker 4: That's a that's a tricky question.
• 33:25
  Speaker 5: I so I think that the challenge with this question
• 33:31
  Speaker 5: comes because people have always overestimated change in the short run,
• 33:36
  Speaker 5: but massively underestimated in the longer run.
• 33:39
  Speaker 3: That's why I gave you, That's why I gave you
• 33:40
  Speaker 3: ten years.
• 33:42
  Speaker 4: Yeah, exactly.
• 33:43
  Speaker 5: I think the framing of the question is is dead
• 33:45
  Speaker 5: right for me. I think it's probably a combination of things.
• 33:50
  Speaker 5: That technology doesn't move forward because of breakthrough inventions, these
• 33:56
  Speaker 5: these sort of dislocations. Instead, it's the combinatory effect of
• 34:00
  Speaker 5: lots of different technologies coming together into new products and services.
• 34:05
  Speaker 5: And so if you take generative AI, which we've talked
• 34:08
  Speaker 5: a little bit about recently, it's what can you do
• 34:11
  Speaker 5: with that technology in combination with all sorts of other
• 34:15
  Speaker 5: technologies which are developing. That opens up this whole new
• 34:18
  Speaker 5: set of possibilities. So healthcare would be a great example.
• 34:22
  Speaker 5: We own some businesses that have fantastic data assets in healthcare,
• 34:27
  Speaker 5: and when you combine that with the power of these
• 34:29
  Speaker 5: a itols, I think you're going to lead to some
• 34:33
  Speaker 5: really transformational changes in what's possible over the next ten years.
• 34:36
  Speaker 5: I think you see it in autonomy that there's a
• 34:40
  Speaker 5: topic that we've talked a lot about for ten years,
• 34:43
  Speaker 5: but it's really starting to happen now. If you look
• 34:46
  Speaker 5: at Google's Weimo, it has second only to Uber in
• 34:49
  Speaker 5: delivering right hailing in San Francisco, rolling rapidly out into
• 34:54
  Speaker 5: new geographies. Our own holding in Aurora innovation in autonomous
• 34:57
  Speaker 5: trucking is now hauling loads in Texas with no driver
• 35:00
  Speaker 5: in the cab. So it's AI and combination with transport.
• 35:05
  Speaker 5: But I think you can you see this in electric
• 35:08
  Speaker 5: aircraft happening today. We're expecting Jobi or flying taxi company
• 35:13
  Speaker 5: to start delivering commercial rides in Dubai by the end
• 35:18
  Speaker 5: of this year. So there are just all of these
• 35:20
  Speaker 5: areas where you're seeing this combination of technologies leading to
• 35:25
  Speaker 5: really big changes. I don't think there's sort of, you know,
• 35:27
  Speaker 5: one thing that's not expected, which is which is people
• 35:31
  Speaker 5: haven't fully appreciated so much as it is the combination
• 35:34
  Speaker 5: of of all of those technologies coming together for new services.
• 35:38
  Speaker 5: If you were really going to push me on what's
• 35:40
  Speaker 5: the one, then I guess I would I would think
• 35:43
  Speaker 5: about holding inside quantum and what would happen if quantum
• 35:48
  Speaker 5: computing becomes available within the next ten years. Because there
• 35:52
  Speaker 5: are so many problems, particularly biological problems where our models
• 35:57
  Speaker 5: are totally inadequate, and where if you could actually do
• 36:01
  Speaker 5: simulations that were really accurate, you know, simulating molecules with
• 36:07
  Speaker 5: a quantum computer, you can achieve a degree of accuracy
• 36:10
  Speaker 5: that's just not possible with conventional technology. Then I think
• 36:15
  Speaker 5: that enables you to solve some of the biggest scientific
• 36:18
  Speaker 5: problems that we're grappling with today, and I think that
• 36:22
  Speaker 5: will blow away almost anything else that's happening.
• 36:27
  Speaker 3: Tom, We've talked a lot about AI.
• 36:29
  Speaker 2: We've talked a lot about how generative AI is going
• 36:31
  Speaker 2: to change the way companies work and the way the
• 36:32
  Speaker 2: world works. So with that in mind, graduation season at
• 36:35
  Speaker 2: the moment, that was saying, lots of kids graduating this week,
• 36:38
  Speaker 2: last week, next week, what should they do. What's the
• 36:42
  Speaker 2: right thing for a kid to study in the right career,
• 36:44
  Speaker 2: for them to look into going into.
• 36:48
  Speaker 5: Well, I think it's clear that we're going to go
• 36:50
  Speaker 5: through a transition here that there are all sorts of
• 36:55
  Speaker 5: jobs that humans do today that these AI systems are
• 37:01
  Speaker 5: going to take over.
• 37:04
  Speaker 4: You know, Autonomy is.
• 37:05
  Speaker 5: A great example of that in the in the physical world,
• 37:08
  Speaker 5: you know, but the truth is that's not something that
• 37:11
  Speaker 5: scares me. I mean, the challenge that we have in
• 37:13
  Speaker 5: transport is that we don't have enough human drivers. They
• 37:18
  Speaker 5: can't get people into the profession. So the fact that
• 37:22
  Speaker 5: we're going to have autonomous systems is going to be
• 37:24
  Speaker 5: a really helpful thing. You know, I don't worry about
• 37:28
  Speaker 5: it displacing jobs, and you're going to need both humans
• 37:31
  Speaker 5: in AI systems in that area for many years to come.
• 37:36
  Speaker 5: In white collar work, I think there is going to
• 37:40
  Speaker 5: be massive disruption of many of the jobs that people
• 37:46
  Speaker 5: do today. But the way this works is that it's
• 37:50
  Speaker 5: going to take over the most drudgerous and boring tasks.
• 37:55
  Speaker 4: Fist.
• 37:56
  Speaker 5: It's going to relieve humans of having to do this work.
• 37:59
  Speaker 5: And you know, people get pessimistic about this because they
• 38:02
  Speaker 5: can't imagine the new jobs that are going to be created.
• 38:06
  Speaker 5: But I I absolutely think that will be the case.
• 38:10
  Speaker 5: And so to this, what what would you know? What
• 38:14
  Speaker 5: should people be thinking about from the point of view
• 38:16
  Speaker 5: studying these things is you're getting as much exposure to
• 38:22
  Speaker 5: these tools as possible. How do you how as an
• 38:26
  Speaker 5: individual are you going to be the best suited to
• 38:28
  Speaker 5: two rules in the future. It's going to be your
• 38:30
  Speaker 5: ability to operate this co intelligence, this, these these tools
• 38:35
  Speaker 5: that help you be more effective in your role. And
• 38:38
  Speaker 5: so I I think that the you know, the stem
• 38:42
  Speaker 5: subjects are absolutely as relevant as as they've ever been.
• 38:48
  Speaker 5: Even though this technology can can automate many of the
• 38:51
  Speaker 5: tasks in those areas, you know that the ability to
• 38:55
  Speaker 5: understand these systems, so understanding physic understanding applied mathematics is
• 39:03
  Speaker 5: just going to be ever more important.
• 39:06
  Speaker 3: Final question toem my, promise what do you reading at
• 39:09
  Speaker 3: the moment.
• 39:09
  Speaker 5: I've been reading The Master and His Emissary, which is
• 39:14
  Speaker 5: a book on brain hemispheres. So the right hemisphere of
• 39:18
  Speaker 5: the brain is the Master and the left hemisphere is
• 39:22
  Speaker 5: the Emissary. And why it's interesting is because when you
• 39:27
  Speaker 5: look at the jobs AI can do. The cognitive tasks
• 39:31
  Speaker 5: that performs well at they are left brain tasks, which
• 39:36
  Speaker 5: you can think of ours, language, logic, reasoning. But the
• 39:42
  Speaker 5: challenge for the left brain is that it can only
• 39:45
  Speaker 5: represent the world. It doesn't see the world as it
• 39:47
  Speaker 5: really is. It builds models of the world, which is
• 39:50
  Speaker 5: really efficient for thinking about things quickly, but there's so
• 39:56
  Speaker 5: much that's given up by representing the world in a
• 39:59
  Speaker 5: model rather than seeing as it really is. And that's
• 40:02
  Speaker 5: the preserve of the right brain. And so for me,
• 40:05
  Speaker 5: it's it's really been useful and trying to think through
• 40:09
  Speaker 5: what these AI systems can and can't do, what the
• 40:11
  Speaker 5: role of humans is in a world where we have
• 40:15
  Speaker 5: these these intelligent tools.
• 40:16
  Speaker 4: To help us.
• 40:18
  Speaker 3: Thank you so much for being with us today.
• 40:20
  Speaker 4: Thank you so much for having me. It's been great.
• 40:27
  Speaker 3: Thanks for listening to this week's Marin Talks Money.
• 40:29
  Speaker 2: If you like ours show, rate, review, and subscribe wherever
• 40:32
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• 40:34
  Speaker 2: to Marrin Money at Bloomberg dot net. You can also
• 40:36
  Speaker 2: follow me in John on Twitter or x I'm at
• 40:39
  Speaker 2: marins w and John is John Underscore Stepic. This episode
• 40:43
  Speaker 2: was hosted by Meet Marre and zumzetwebs, produced by some
• 40:45
  Speaker 2: Sadi Moses and Amantala Amadi. Sound designed by Kelly Gary
• 40:49
  Speaker 2: and special thanks of course, as always to Thomas Later